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Industry Circular 2020-3

May 8, 2020 Number: 2020 – 3

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Trade Practice Enforcement During COVID-19 Pandemic

To:  Proprietors of Bonded Wineries, Bonded Wine Cellars, Beverage Distilled Spirits Plants, Breweries, Importers, Wholesalers, and Others Concerned: The Alcohol and Tobacco Tax and Trade Bureau (TTB) has received questions about the applicability of the trade practice provisions of the Federal Alcohol Administration (FAA) Act and TTB regulations in the changed business circumstances of COVID-19.  This Industry Circular clarifies how TTB will apply the FAA Act to specific practices during the time period specified in the “Applicability and Scope” section below. Authority. The Tied-House provisions of the FAA Act (27 U.S.C. 205(b)) make it unlawful for an industry member1 to directly or indirectly induce a retailer engaged in the sale of alcohol beverages to purchase such products from the industry member to the exclusion, in whole or in part, of alcohol beverage products sold or offered for sale by other persons in interstate or foreign commerce.  The Tied-House provisions of the FAA Act list specific activities that are considered inducements, including but not limited to “furnishing, giving, renting, lending, or selling to the retailer, any equipment, fixtures, signs, supplies, money, services, or other thing of value” (subject to certain exceptions) and by “extending to the retailer credit for a period in excess of the credit period usual and customary to the industry for the particular class of transactions.”  See 27 U.S.C. 205(b)(3), 27 U.S.C. 205(b)(6), and 27 CFR 6.21(c) and (f). The FAA Act’s Commercial Bribery provisions make it unlawful for an industry member to directly or indirectly induce purchases of its products through commercial bribery or by offering or giving any bonus, premium, or compensation to any officer, employee, or representative of a “trade buyer,” i.e., a beverage alcohol wholesaler or retailer.  See 27 U.S.C. 205(c) and 27 CFR 10.21.  Gifts, donations, and other payments by an industry member to trade buyer employee associations are considered the same as bonuses, premiums, compensation, or other things of value given directly to the employees, since the benefits resulting from the gifts or payments flow to the individual members of the association.  See 27 CFR 10.22. For both Tied-House and Commercial Bribery provisions, assuming the jurisdictional elements are met and, for malt beverage products, there is similar State law, a violation would occur if TTB were to show that the inducement resulted in exclusion, in whole or in part, of alcohol beverages sold or offered for sale by other persons in interstate or foreign commerce. The sale or purchase of alcohol beverage products with the privilege of return violates the Federal Consignment Sales provisions.  See 27 CFR 11.21.  Returns for ordinary and usual commercial reasons arising after the product has been sold are not prohibited, but the return or exchange of a product because it is overstocked or slow-moving does not constitute a return for ordinary and commercial reasons.  See 27 CFR 11.45. Applicability and Scope. This Industry Circular applies to all affected TTB-regulated industry members and is subject to the specific limitations provided herein. Activities covered by this Industry Circular include:
  1. Product Returns;
  2. Extension of Credit Terms;
  3. Furnishing Gift Cards to Consumers;
  4. Donations to Charities that Support Alcohol Beverage Retailers and Their Employees; and
  5. Hand Sanitizer.
This Industry Circular will be in effect from March 1, 2020 through September 30, 2020, with the possibility for extension as TTB may deem appropriate.  This Industry Circular applies only to Federal law.  Questions about State or local restrictions should be directed to State or local alcohol beverage authorities. Discussion.
  1. Product Returns
As previously announced in our March 13, 2020 Newsletter, TTB will not consider returns of alcohol beverage products purchased to sell during events cancelled based on COVID-19 concerns to violate Federal Consignment Sales rules, provided the products were not initially purchased or sold with the privilege of return.  Similarly, trade buyers (wholesalers and retailers) who have closed or substantially reduced operations due to COVID-19 shelter-in-place and stay-at home-recommendations, may return alcohol beverage products to industry members for cash or credit against outstanding indebtedness as long as the original sale was not made with the privilege of return. See 27 CFR 11.21.2 Industry members are under no obligation to accept returns of alcohol beverage products.
  1. Extension of Credit Terms
TTB is aware that many States have recently instructed alcohol beverage retailers to cease or greatly reduce operations due to concerns related to COVID-19.  Because of this, industry members have asked TTB whether they may extend credit terms to affected retailers beyond the credit period that is usual and customary in the industry, without violating the Tied-House provisions of the FAA Act.  TTB regulations specify that extension of credit to a retailer for a period of time beyond 30 days from the date of delivery constitutes a means to induce. See 27 CFR 6.21(f) and 27 CFR 6.65. During the effective period specified in this Industry Circular, TTB will not apply the provisions of 27 CFR 6.21(f) and 27 CFR 6.65 for extensions of credit up to 120 days.  This does not affect an arrangement in which the wholesaler or retailer is under no obligation to pay for the alcohol beverages until they are sold by the wholesaler or retailer, which is prohibited by the FAA Act. See 27 U.S.C. 205(d) and 27 CFR part 11.
  1. Furnishing Gift Cards to Consumers
TTB has been asked whether, or under what circumstances, industry members may purchase gift cards from retailers and provide those pre-paid gift cards to people in need.  An industry member may donate pre-paid gift cards directly to consumers, provided that the gift cards are not tied to an alcohol beverage retailer, retailer group, or restaurant.  For example, industry members may donate pre-paid debit cards, such as those issued by banks or bearing the logo of a major credit card company, and encourage consumers to use the gift cards to support retailers or restaurants of the consumer’s choice, so long as the industry member does not give those items to wholesaler and retailer officers, employees, or representatives.  See 27 CFR 6.96(b). However, the purchase of pre-paid gift cards redeemable solely at a specified alcohol beverage retailer or retailer group would constitute an inducement.  For example, the purchase of gift cards that can only be used at “Pat’s Bar and Grill” and the subsequent providing of those gift cards to consumers would be considered an inducement.  As discussed in the “Authority” section above, an inducement can violate the FAA Act if the other legal elements are present.
  1. Donations to Charities that Support Alcohol Beverage Retailers and Their Employees
Industry members have also asked TTB whether the trade practice provisions of the FAA Act allow them to provide monetary donations to support alcohol beverage retailers and their employees, either directly or indirectly through charitable organizations. TTB views payments from industry members to retailers or employees of retailers as inducements whether made directly, indirectly, or through an affiliate.  As discussed in the “Authority” section above, an inducement violates the FAA Act if the other legal elements are present.  Although payments to charities could constitute inducements, TTB will not initiate investigations on industry members who make donations to charities that support alcohol beverage retailers or their employees during the specified effective period of this Industry Circular, provided that such donations are not conditioned on purchases of, or shelf space for, the industry member’s products.
  1. Hand Sanitizer
Industry members have asked TTB whether providing hand sanitizers to consumers violates the trade practices provisions of the FAA Act.  There are no trade practice restrictions on industry members selling hand sanitizers directly to consumers or providing hand sanitizers, free of charge, directly to consumers.  See 27 CFR 6.96(b).  Additionally, packaging and distributing distilled spirits, wine or malt beverage products in combination with other non-beverage items, such as hand sanitizer, for sale to consumers is allowable.  See 27 CFR 6.93. For information about TTB’s other COVID-19-related guidance, including guidance relating to the production of hand sanitizers, please visit https://www.ttb.gov/coronavirus. Questions. If you have any questions concerning this or any other Industry Circular related to Trade Practice regulations, you may send them to tradepractices@ttb.gov. Mary G. Ryan Acting Administrator Alcohol and Tobacco Tax and Trade Bureau 1 An industry member includes any person engaged in business as a distiller, brewer, rectifier, blender, or other producer, or as an importer or wholesaler, of distilled spirits, wine, or malt beverages, or as a bottler, or warehouseman and bottler, of distilled spirits.  See 27 U.S.C. 205. 2 If TTB finds that the original sales were made with the privilege of return, these COVID-19-related returns may constitute prohibited consignment sales. See 27 U.S.C. 205(d) and 27 CFR part 11.